MATERIALS BUDGETING

A budget is a co-ordinated financial estimate of the income and expenditure of an organization related to a specified future period. It may be defined as “Budget is a plan of action quantified in money terms for some future period”

A budget serves the following purposes:-

  • Planning the activities of various departments,
  • Controlling such activities of the departments
  • Fixation of objectives and targets of all such activities of the departments
  • Closely watching the performance of various departments
  • Detection of deviations etc, if there is any and
  • Application of correctives so as to help in achieving the objectives and targets.

Materials budgets
A materials budget is coordinated estimate of the consumption and purchases of materials in an organizations relating to a specified period. The purp9ose of a materials budget is:-
1. To plan and control purchases
2. To asses and make a provision for the financial requirement of such purchases
3. To plan and control the production schedule.
4. To watch the activities of the purchases and materials control departments.
5. To suggest ways and means of improvements in the next budget estimate.

Factors governing drawing up of a materials budget
The following are the main factors which govern drawing up a materials budget

1.The past rate of consumption and its ratio with production. The rate of consumption plays a vital role in framing a materials budget since it is a factor which gives two important points for careful study so as to help forming correct estimate of materials for the ensuing period that is

  • period-to-period consumption of materials in relation to production programme and the product produced. And
  • period-to-period investment made. The ratio of consumption and consequent production is also important as it helps in taking a decision on the future course of action, particularly production planning, purchases and sales planning which are directly dependent on this ratio.

2. The production program me of the future specified period for which the materials budgets is intended. Production programme is obviously one of the important factors of the materials budget. It is the very basis of a materials budget. No one can plan anything or
estimate a future course of action unless he is in the know of the objectives and targets to be achieved. And for achieving the target a budget is required. The rate of consumption may remain more or less the same for a labourer or a machine, but it often varies with the
variance in production programme. The rate of consumption is directly related to the production programme which one has set for oneself and a materials budget is governed and guided by this factor to a great extent.

3. The financial burden and investment pattern. No amount of good intention on the part of production programmes will help them in achieving targets and objectives unless backed by a good financial commitment and a well-set out investment pattern. The main task of the framers of materials budget is to allocate available funds in a manner in which maximum value is extracted from them without disturbing the production programme. Here the efficiency of the framers is put to test and the very success of a budget depends on the
proper allocation of funds. The means in every organization are scarce and the uses numerous. Tactful and intelligent utilization will lessen the financial burden and set out a well-planned and effective investment pattern.

4. The materials cost. This factor too affects the materials budget in the sense that it directly influences the financial commitment of the organization. A study, therefore, of the cost trend of the materials is required. Future trend has also to be studied and incorporated while preparing a materials budget.

5.The demand and supply curve. Here also study of market conditions pertaining to the demand and supply trend is to be made before venturing to draw up a materials budget as the production schedule and financial commitments have to be adjusted according to the
trend in the market. A forecast, correct one, may for a long way in achieving the purpose of materials budgeting. While setting a demand curve due care should be taken of the storage loss due to circumstances beyond human control, such as floods, transport bottlenecks, war etc.

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